East West Bancorp, Inc. — FY2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 10-K, not a standalone quarterly filing, although fourth-quarter items are disclosed. KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Business Context
East West Bancorp is a bank holding company for East West Bank, a commercial bank focused on individuals and businesses operating between the United States and Asia, with a significant Asian American customer base. The Company operated more than 120 locations in the U.S. and Asia and reported three operating segments: Consumer and Business Banking, Commercial Banking, and Other.
At December 31, 2023, the Company had $69.6 billion of assets, $51.5 billion of total net loans, $56.1 billion of deposits, and $7.0 billion of stockholders’ equity.
Financial and Operating Metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net interest income before provision | $2.312 billion | $2.046 billion | Up 13% |
| Noninterest income | $295 million | $299 million | Down 1% |
| Total revenue | $2.608 billion | $2.345 billion | Up 11% |
| Provision for credit losses | $125 million | $74 million | Up $52 million |
| Noninterest expense | $1.023 billion | $859 million | Up 19% |
| Net income | $1.161 billion | $1.128 billion | Up 3% |
| Diluted EPS | $8.18 | $7.92 | Up 3% |
| Adjusted diluted EPS | $8.56 | $7.92 | Up 8% |
| Net interest margin | 3.61% | 3.45% | Up 16 basis points |
| Return on average assets | 1.71% | 1.80% | Down 9 basis points |
| Return on average common equity | 17.91% | 19.51% | Down 160 basis points |
| Efficiency ratio | 39.22% | 36.65% | Up 257 basis points |
Balance Sheet, Credit and Capital
- Total assets increased 9% to $69.6 billion, primarily from loan growth and higher cash balances.
- Total loans increased 8% to $52.2 billion. Commercial loans represented 71% of the portfolio; CRE loans were $20.5 billion, or 39% of loans, and residential mortgage loans were $15.1 billion.
- The allowance for loan losses increased to $669 million from $596 million. Total allowance for credit losses, including unfunded commitments, was $706 million.
- Net charge-offs rose to $46 million, or 0.09% of average loans, from $18 million, or 0.04%, in 2022.
- Nonperforming assets increased 14% to $114 million, or 0.16% of total assets. Criticized loans increased 9% to $978 million.
- Stockholders’ equity increased 16% to $6.95 billion. Book value per share rose to $49.64 from $42.46, and tangible book value per share rose to $46.27 from $39.10.
- The Company and Bank remained well capitalized. At year-end, Company and Bank CET1 ratios were 13.3% and 12.6%, total capital ratios were 14.8% and 13.8%, and Tier 1 leverage ratios were 10.2% and 9.6%, respectively.
Cash Flow, Funding and Liquidity
- Operating cash flow was $1.425 billion; investing activities used $4.247 billion; financing activities provided $3.962 billion.
- Cash and cash equivalents increased 33% to $4.615 billion.
- Deposits were essentially stable at $56.1 billion, but the mix shifted materially: noninterest-bearing demand deposits declined 26% to $15.5 billion, while time deposits increased 35% to $18.0 billion.
- The loan-to-deposit ratio increased to 93% from 86%.
- Year-end short-term borrowings were $4.5 billion under the Federal Reserve’s Bank Term Funding Program, compared with none at year-end 2022. Long-term debt was $148 million.
- Cash, interest-bearing bank deposits and reported borrowing capacity totaled $29.8 billion, compared with $26.5 billion in 2022. Management stated that liquidity was adequate for ordinary-course needs.
- Total uninsured deposits were $30.7 billion, including $27.6 billion in domestic deposits. Domestic uninsured deposits excluding collateralized and affiliate deposits declined to 42% of domestic deposits from 51%.
Material Changes Versus 2022
- Higher benchmark interest rates, loan growth and increased yields on cash and securities drove net interest income higher, but deposit and borrowing costs also rose substantially.
- Average noninterest-bearing deposits declined 25% to $17.2 billion, while average deposit costs increased to 2.19% from 0.46%.
- Commercial Banking net income decreased 6% to $478 million because higher credit-loss provisions and expenses more than offset revenue growth. Consumer and Business Banking net income decreased 2% to $596 million.
- Noninterest expense included a $70 million pre-tax FDIC special assessment related to losses from 2023 bank failures. The Company also incurred a $4 million charge to extinguish repurchase agreements and recorded a $7 million net loss on an AFS debt security.
- Adjusted efficiency ratio was 31.63%, compared with 31.74% in 2022, excluding specified unusual items.
- The Company repurchased 1.5 million shares for $82 million during 2023; $172 million remained available under the authorization at year-end. Dividends declared increased to $1.92 per share from $1.60.
- Unrealized losses on AFS debt securities declined to $729 million from $845 million, primarily reflecting interest-rate and spread movements rather than identified credit impairment.
Outlook, Commentary, Risks and Unusual Items
Management described a potentially improving macroeconomic outlook, including slower inflation and the possibility of Federal Reserve rate cuts, but noted continued risks from elevated rates, commercial real estate weakness, geopolitical conflict, inflation, potential government disruption and financial-market volatility. The Company does not provide a specific earnings or revenue forecast in the provided filing text.
- Interest-rate risk: The Company reported a modestly asset-sensitive position. A modeled immediate 200-basis-point increase in rates was estimated to increase 12-month net interest income by 1.3%, while a 200-basis-point decline was estimated to reduce it by 4.1%. Modeled economic value of equity would decline 10.3% under a 200-basis-point increase.
- Credit and CRE concentration: Approximately 69% of CRE loans were concentrated in California, creating sensitivity to California economic conditions and property values. Management’s downside CECL sensitivity indicated an allowance approximately $343 million higher under a fully downside-weighted scenario, before overlays and qualitative adjustments.
- Liquidity and uninsured deposits: The Company remains exposed to rapid deposit withdrawals, higher funding costs and reduced collateral values, particularly given the substantial level of uninsured deposits and the 93% loan-to-deposit ratio.
- FDIC assessment uncertainty: Following a February 2024 increase in the FDIC’s estimated losses related to Silicon Valley Bank and Signature Bank, the Company could not reasonably estimate whether its special assessment would be increased or modified.
- Regulatory developments: The Company is evaluating revised Community Reinvestment Act requirements, potential resolution-planning requirements for banks with $50 billion to $100 billion of assets, climate-related reporting obligations and other evolving banking rules.
- Cybersecurity and operations: The Company reported no known cybersecurity incidents that materially affected its business, financial condition or results, but identified cyberattacks, third-party failures, fraud and technology disruption as material risks.
- Subsequent events: The Company declared a first-quarter 2024 dividend of $0.55 per share. It also announced redemption of $113 million of junior subordinated debt and $4 million of related trust preferred securities; $16 million was redeemed in February 2024 and $101 million was scheduled for March 2024.
Most Important Facts for Investors to Verify
- Whether deposit costs and migration from noninterest-bearing to interest-bearing products pressure net interest margin as rates change.
- Credit performance in California CRE, multifamily, C&I and construction portfolios, including criticized loans, nonaccrual loans, charge-offs and allowance adequacy.
- The final amount and timing of any additional FDIC special assessment.
- The maturity and refinancing implications of the $4.5 billion of BTFP borrowings and the Company’s ongoing wholesale funding needs.
- The effect of unrealized securities losses, interest-rate movements and deposit assumptions on tangible capital and liquidity.
- Regulatory capital treatment as the CECL phase-in continues through 2024 and as banking regulations evolve.
- The sustainability of loan growth, dividend increases and share repurchases relative to capital, liquidity and credit-risk requirements.